Category Archives: Bruno’s posts

Value Proposition and Trust

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This article is about the difference between perception and reality, between what you think about the US market and what the US market thinks about you.

In other words, we are having a conversation about the reasons why Americans might hesitate to buy your product, even if it is clearly a superior one. It is about what needs to be done to bring them over the edge, and get them to sign an order, a distribution agreement, or a letter of intent.

The American market is abundantly supplied by US and established foreign producers, offering just about everything: quality, diversity, service, information and competitive prices.

Because of its size and high degree of sophistication and standardization, the US market attracts newcomers, American and foreigners, every day.

In other words, it is not an easy market to penetrate.

Thankfully, Europeans usually offer products with a great value proposition; products they think will be hard for Americans to resist. 

This may be true, but a great value proposition doesn’t tell the whole story.

Americans are often labeled as chauvinistic when they appear to prefer “Made in USA” products rather than the “superior solution” Europeans are offering.

In reality, US potential partners and customers are usually open to foreign-made products, as long as they can get something substantial (money, status…) out of them. Their first question will be: What’s in it for me?

But if this first question is easy to answer (great value proposition!), it is immediately followed by a number of worries, questions that may not be expressed, and boil down to trust. To his colleagues, your American contact may be saying something like: “Their product looks great, but can we trust these guys?” 

 

Let’s go over a few of these worries.

How long have they been doing business in this country?

Even if you export to 50 different countries from Lithuania to Malaysia, what your US partners are really concerned with is the South, or MidWest, or whichever region the market is. Worries: What is their local presence? Do they have US references? What have they already achieved in the US? Do they know the competition? Are they member of our industry association?

How important is the US market for them?

This question really means: How long will they stay here? No one likes to invest time and resources in a project that might be abandoned as soon as the Euro starts climbing again. If they have a feeling that you are over-optimistic or unprepared, they might worry about the unpleasant surprises you will face. Worries: How much funding have they set aside to sustain their market entry? What is their expected pay-back period? Who will manage the US operation? How profitable could their US operation be? How much personnel are they hiring?

Where is their US operation located?

Even when your market penetration strategy is based on a well-structured agreement with a US distributor, the frequency of your presence in the United States will often be critical to your success. European mid-sized companies have a tendency to be understaffed, especially the successful fast-growing ones. Travel time to, from and inside the USA takes a toll on overworked management. Worries: Who will take care of sales rep training and motivation programs? How and when will they visit our 178 points of sale? Will they attend our quarterly meetings? Who will prepare the next trade fair?

What are their marketing tools?

Even if English language literature is available, it may have to be put to the test. US terminology and spelling are considerably different from anything you have seen in Europe. Americans are not used to brochures in three different languages, and regular references to European standards or units will raise eyebrows. Poor English syntax or literal translations from a European idiom will make Americans smile, but are not conducive to a strong relationship. Worries: What do they mean with “spanner” and “gearbox”? Will they start using a US marketing agent? How good is their website SEO? Do they have a speaker for the upcoming conference?

Their technology looks great. How about their after-sales service?

Americans will hardly be reassured when told that “our technicians speak English”. They want to know where the service team is located, how long it will take them to fix a breakdown or replace critical parts. Your US partners don’t want to call and leave a voice message to a recorder located 6 or 9 time zones away. Worries: How many technicians do they have on the east coast? How were they trained? Do they also work for other companies? Where do they store spare parts?

Finally, the entire trust issue also depends on whether a bond is created between you and your American partner, between your people and theirs. This is chemistry. Inviting them to visit your company in Europe, or spending time visiting their offices and plant will go a long way.

 

All the above worries will have to be addressed, whether they have been expressed or not.

A market analysis, strategy, marketing and financial plan professionally prepared by US-based COGNEGY is likely to inspire the confidence that your US partners are seeking. You will have all the solutions ready to answer their worries. This is what we have done for over 30 mid-sized European companies in the last 30 months.

After all, if your company has spent decades to develop, produce and market great products all over the world, it would be a shame to stumble on America’s shores because of worries that have little to do with these products. 

Discover the hidden faces of the USA

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You might even be surprised by Charleroi, Pennsylvania or come across Antwerp, Ohio, small towns offering an off-the-beaten-path familiarity to the Belgian tourist tired of the Yellowstone and Times Square.

Some 200,000 Belgians emigrated to this vast country since 1820 and left their mark; farmers, miners, crafts people, and skilled workers from the Walloon glass industry or the Flemish textile mills.

Just like all other settler groups, they stuck together at first, and so gave their region a unique character, a culture and appearance as different from other US regions as the Balkans are from Scandinavia.

Look at the State of Virginia, a member of the Union since 1787, a slave state then, known the world over for its prime tobacco, the proud home of the earliest (1607) settlers and of George Washington.

How could this state even remotely resemble Oregon, a northwestern state four time zones away, covered by huge forests, shaped by the imposing Rocky Mountains, producing some of the best wines I have ever tasted, and under British authority up to 1848?

While most people familiar with the vast expanse of the United States understand its geographic diversity (landscape and climate), they find it very comfortable to deal with just one currency, one language, one cell phone network, credit cards welcome everywhere and familiar benchmarks (from Burger King to Starbucks to Hampton Inn) in the most remote places.

For the Belgian entrepreneur, however, seeking to emulate the spirit of the earlier settlers, the hidden diversity of the various American states often comes as a surprise.

us states

50 Shades of USA

For starters, every single state, has been crafted by its history, natural resources and climate. The latest one, Hawaii, only joined the Union in 1959, 172 years after Delaware, the first state to ratify the Constitution.

Next, every single US state has a republican (with a small “r”) government, meaning one with three branches of government (executive, legislative and judicial). In all 50 states but one (Nebraska), the legislative branch has two chambers (House and Senate). Importantly, all states handle their own affairs, except for those delegated to the federal government.

In other words, if states reluctantly tolerate the federal government, they still influence a wide range of affairs: education, health insurance, most of the laws, economic development, welfare and employment rules, financial institutions, environment, energy, consumer protection, housing, agriculture…

Shaping the health, welfare and education of their people, steering the economy, stimulating or hindering businesses and in countless other ways, the 50 US states have achieved success, failure, and everything in between.

To illustrate how every state tells a story quite different from the America stereotypes prevailing abroad, 19 states have abolished the death penalty, with more to come. The life expectancy at birth is of 86.2 years in Minnesota, and 74.1 in Montana, a full 12 years less. Median household income is $70,004 in Maryland, $36,919 in Mississippi and on average, $50,502 for the entire United States.

Even more important than the present day disparities, in every American state and region things are changing fast and in different directions. Housing prices are recovering in a spectacular way in Florida, Arizona, Nevada… after the real estate meltdown of 2008. Employment in 2014 grew over 3% in states like Utah, Texas, Florida and Nevada, and more than 5% in North Dakota.

Some states see their population shrink through aging and emigration, while others attract certain categories of people: senior citizens in Florida and Arizona, young workers in North Dakota and Texas, high tech specialists in California or Colorado.

Oklahoma’s economy grew 4.2% in 2014, while Wyoming’s expansion was 7.6%.

If average weekly wages remain stuck at a low $794 in Montana and $826 in Maine, workers make $1,321 in New York and $1,315 in Massachusetts.

Why is this important to the Belgian entrepreneur?

Whether you are looking at a first-time US market penetration, the expansion and consolidation of your US “beachhead”, investing in logistics or production assets, setting up a joint-venture or the acquisition of a US company, your decisions need to be based on knowledge, not on fortuitous encounters.

Even if people or potential partners you have met coincidentally in the United States may help, your best decisions are usually made when you have a choice, when you can line up several options, and are able to choose the best ones among them.

Some distribution channels cater to the suburban affluent, others to progressive big city environmentalists.

In some areas, low wages could mean very low productivity, while high wages might reflect a crucial shortage of qualified workers.

In some regions your family or employees will thrive, in others a harsh winter will shut down your business for weeks.

Virginia, North Carolina and Georgia, all on the east coast, are among the top 4 US states ranking best in “regulatory environment”, a crucial component of the business friendly climate you would like to operate in. Do you really want to go through California’s jungle of earthquake-related rules and specifications, easily adding 20% to the cost of your greenfield production plant?

New York, arguably the most expensive US city, combines high labor costs and powerful unions, an unwelcome familiarity among a wealth of more attractive features.

Decisions, decisions… they are not that difficult to make once you possess all the relevant information.

Competitive Manufacturing

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Summary
How things change… A new BCG study released on April 25, 2014 throws away out-of-date perceptions on which countries have the lowest manufacturing costs. If China is still ranked #1 in terms of global competitiveness, its position is now under pressure with the United States a close second. The world is not divided anymore between “low cost” emerging countries and “expensive” advanced economies.
What does it mean for investors and decision makers? Where should your next production plant be located?

Manufacturing Cost Competitiveness (MCC)
BCG’s study tracked 25 major exporting countries, accounting for close to 90 percent of global exports of manufactured goods. Their MCC index is built on four pillars of manufacturing competitiveness: wages, productivity growth, energy costs and currency exchange rates. Adjustments were made to take into account other drivers influencing a nation’s competitive position, such as available infrastructure, security issues, ease of doing business, corruption level…

Ranking and evolution
Apart from China and the USA, the final Top Ten MCC ranking includes the U.K. (4), the Netherlands (6), Belgium (9) and France (10) but this “photo finish” doesn’t tell the full story. A clearer picture is offered when classifying the countries in four categories, reflecting the trend of their competitive position. Highlights:

   Under Pressure: Rapidly deteriorating competitiveness affects Brazil, Russia, China, Poland, Czech Republic…
   Losing Ground: High cost countries coping with rising energy costs, high wage costs and no productivity gains. Belgium, France, Italy, Sweden…
   Holding Steady: Countries maintaining their position relative to the global leaders: Netherlands, U.K., India, Indonesia.
   Rising Stars: Increased competitiveness with gains in all four index components: U.S.A., Mexico

Click here for the press release on the BCG study.

What are the implications for business leaders?
The first message is that decision makers need to keep track and adjust to dramatic and rapid changes. Old (as in ten-years-old) perceptions stand in the way of new realities. “Overall costs in the USA are 10 to 25 percent lower than those of the world’s ten leading goods-exporting nations other than China”, the report says, and on par with Eastern Europe.
Entrepreneurs do not move their production facilities based on the latest trend or hype. Such a move has huge implications, is very costly and requires an economic horizon of at least one, usually two decades. This is true for medium sized firms as much as for global corporations.
This is why managers and investors should base such a strategic decision on solid cost structure evidence and the analysis of long term trends. Just like when buying shares on the stock exchange, if you follow the mainstream opinion, your late move is likely to end up in painful losses.

Where should your production plant be located?
Whether looking at added capacity or transplanting production, the decision of where your new plant should be built is obviously the subject of a careful strategic analysis. You will make a first selection of countries where wages, energy costs, productivity and currency all point in the right direction, and where the other drivers (ease of doing business, infrastructure, stability, rule of law…) are consistently positive.
Each firm is however a unique case, only partially influenced by macroeconomics. After all, your first concern is with your market, your customers, your people and your identity. This is why you will also want to consider a broad range of company-specific criteria, such as:

  • Competitive sourcing and efficient supply chain
  • Location and dynamics (growth, innovation) of your main markets
  • Availability of skilled labor and qualified specialists
  • Ease of adjustment to the local culture
  • Global market prestige and local market access
  • Access to local funding.

Building a production plant in a distant, foreign country, is a major strategic decision, one that might ensure growth and profitability for decades to come, if done right. When deciding where to move, take a new look at today’s evidence and tomorrow’s evolution, not at yesterday’s performance.